Plosser says he would favor tapering QE at June FOMC meeting

Federal Reserve Bank of Philadelphia President Charles Plosser said unemployment will probably fall to 7% at the end of 2013 and he would favor reducing the Fed’s $85 billion monthly pace of bond purchases next month.

“I would like to see us begin to scale this thing back beginning even as early as the next meeting” of the Federal Open Market Committee, Plosser said to reporters after a speech today in New York. The committee is scheduled to meet June 18-19. Plosser doesn’t vote on policy this year.

Plosser’s remarks highlight a debate within the FOMC on whether to expand or curb a pace of bond purchases that has pumped up the central bank’s balance sheet to $3.32 trillion. At their April 30-May 1 meeting, policy makers said they’re prepared to increase bond buying in response to changes in the labor market or inflation.

Plosser, who didn’t support the start last September of a third round of bond purchases, is more optimistic about growth than some of his colleagues. He expects the economy to expand by 3% this year and next, with the unemployment rate declining to around 6.5% by the end of 2014, he said.

In March, most policy makers forecast growth of 2.3% to 2.8% this year, with a jobless rate at year end of 7.3% to 7.5%. Plosser’s forecasts place him as one of the three most optimistic policy makers on growth and unemployment for 2013.

The costs of bond buying exceed the gains, Plosser said. The purchases are “risky” and offer “pretty meager” benefits, he said.

Further Stimulus

If the economy weakened and the central bank needed to provide further stimulus, policy makers will be “kind of limited” in their options, Plosser said.

While the unemployment rate has moved toward the Fed’s goal of 5.2% to 6% during the past year, inflation has fallen further from the Fed’s long-run target of 2%. Inflation dropped to 1% from a year earlier in March, the slowest since 2009, according to the Fed’s preferred inflation gauge.

“We have to defend our inflation target both on the upside and the downside,” Plosser said. “As long as inflation expectations remain well-anchored then I’m reasonably comfortable.”

Plosser, 64, became president of the Philadelphia Fed in August 2006. He was previously dean of the business school at the University of Rochester in New York state. The Philadelphia reserve bank will next have a vote on policy decisions in 2014.